Leon Black, the founder of New York private investment giant Apollo Management, has told investors that his firm is “extremely well positioned to take advantage of opportunities emerging during this cycle” – a cycle he refers to in a letter as “interesting times”.
The letter, sent to Apollo limited partners last month and obtained by PEO, gives an overview of the performance of the firm’s two most recent funds and provides commentary by Black on the opportunity presented by the current market dislocation.
Apollo has since August acquired $1 billion in distressed securities, in addition to executing add-ons and new deals with “creative structures”, Black wrote. As an “investment manager for all seasons”, Apollo is primed to thrive amid periods of distress, he wrote, noting strong IRRs generated by Apollo amid the 1990-to-1992 and 2001-to-2002 recessions.
Black noted that the most recent Apollo fund, Fund VI, is in “very good shape” and already showing strong realized and unrealized gains, despite some write downs on some unspecified portfolio companies. “[W]e don’t believe these credits to be long-term impaired,” Black wrote.
Like many large private equity firms, Apollo owns portfolio companies that have issued bonds that are currently trading below par. Black argued in the letter that the flexibility of terms in these bonds is partially the cause of their decrease in value. He also notes that attractive holding-company debt issued prior to the credit crunch is weighing on bond prices. “[T]he press does not distinguish between the underlying health of a company and a shift in the credit markets,” Black wrote, adding that Apollo was in some cases buying some of its portfolio companies’ own debt.
As to whether the US is currently in a recession, Black wrote: “[T]hat may very well be the case. The important reality is that we are most certainly in a credit crunch and we have focussed the resources of the firm on evaluating the global opportunities created by this dislocation.”